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Michèle Eisenhuth of Arendt & Medernach says Luxembourg’s financial regulator has requested more fund redemption data from asset managers during the covid-19 crisis. Pictured: Michèle Eisenhuth is seen speaking at an Association of the Luxembourg Fund Industry conference, 25 September 2018. Photo credit: ALFI 

A total of 36 Luxembourg funds temporarily blocked investors from withdrawing their assets in March, said the analysts Fitch Ratings. This accounted for nearly half of European funds which were “gated” in this way. Yet the investments affected in Luxembourg accounted for just over 0.1% of net assets domiciled in this country.

As Delano reported, 35 of the 36 Luxembourg funds affected belonged to Danske Invest, managed from Denmark. A spokesman for Dansk Invest told Delano they had “suspended funds during periods when the [net asset value] cannot be calculated accurately”.

However, it appears that this wasn’t so much a question of excessive liquidity problems with these funds rather than “the Danish regulator’s relatively liberal approach to gating,” someone familiar with the company told Delano. Indeed, Danish-based funds accounted for nearly three-quarters of gated funds in Europe in March, according to Fitch. “Questions were raised at the [Luxembourg financial regulator] CSSF about this, but these gates we lifted within days,” said the person.

Globally, it tended to be open ended property funds and corporate debt funds which experienced the most problems and the occasional suspension. Also some ETFs and money market funds felt strains. None of this affected Luxembourg directly.

Richard Marshall of Carne is seen attending an Association of the Luxembourg Fund Industry networking event in New York, 17 April 2018. Photo credit: ALFI
Richard Marshall of Carne is seen attending an Association of the Luxembourg Fund Industry networking event in New York, 17 April 2018. Photo credit: ALFI

Global effort was key

Only around a quarter of the 11.1% drop in net assets Luxembourg funds in March was due to client redemptions. Mostly this was due to record-breaking global policy interventions preventing investment valuations crashing further. However, it also helped that supervisory authorities in Luxembourg and around the world adapted. “The CSSF learned from the 2008 financial crisis the value of regulatory flexibility during the height of a market storm,” commented Richard Marshall, a director with fund management services provider Carne.

For example, asset managers were given more freedom to use swing pricing techniques which seek to pass on the cost of fund redemptions to investors leaving a fund. Also the CSSF suspended temporarily the need for regulatory checks before firms could start using cloud computing systems to help the move to remote working. Many reporting deadlines were also extended. This was at a time when the CSSF had moved almost completely to remote working, a shift which appears not to have affected their response rate considerably.

Added strains

It wasn’t all one way traffic though, as “specific data reporting was requested to help the CSSF to have a clear understanding of the challenges faced by funds,” noted Michèle Eisenhuth, a partner with Arendt & Medernach, a law firm. Specifically this related to reporting on redemptions and whether funds could ensure the liquidity clients requested, and whether any changes would keep funds within EU rules.

Some firms found this a strain. It came on top of the shift to working from home, the stresses in the markets, while also keeping an eye on the greater recent focus on money laundering rules and the need to record certain phone conversations. Local and European regulators worked together. As well as providing firms with temporary relief, “they have also opted to extend the comment period on several open consultations and delay the implementation dates on some new rules,” noted Eisenhuth.

So far so good, but with the economy in a weak state markets will be hit as businesses of all sizes find it impossible to continue over the long term.